Prudential Webinar: how to assess liquidity requirements

On 11th October 2023, Cosegic hosted another helpful webinar for FCA-regulated firms (with a focus on MIFIDPRU Investment firms) which covered the topic of ‘how to assess liquidity requirements’.

Over the past year, liquidity requirements have started to become a pain point for many of our clients. This is largely down to three contributing factors.

• Increasing FCA focus on liquidity and financial resilience,
• Lack of clarity over how the rules should be applied, and,
• The current economic climate

This webinar provided attendees with a practical overview of the liquidity rules, including guidance on how firms can assess their resources, requirements and the approaches that firms can implement for assessing ongoing liquid asset requirements, as well as for wind-down liquidity requirements.

Background

Over the past year, liquidity requirements have started to become a pain point for many of our clients. This is largely down to three contributing factors.

Over the past year, liquidity requirements have started to become a pain point for many of our clients. This is largely down to three contributing factors.

Firstly, and perhaps not a surprise to many, the FCA’s increasing focus on liquidity and financial resilience. The FCA started issuing financial resilience surveys during Covid, and although conditions have largely returned back to pre-Covid times, the FCA continue to request more financial data – and has even introduced a new FIN073 return for those firms not regularly reporting on their liquidity position. The FCA’s stance is that firms should hold sufficient liquidity not only to meet business-as-usual obligations, but also to consider holding additional liquidity towards mitigating potential harms, periods of stress and also being able to wind-down their business in an orderly manner.

When the FCA writes to firms, liquidity management is often at the top of their agenda. Specifically, where the FCA has reviewed ICARAs they frequently comment on the assessment of additional liquidity requirements and ask firms to revisit their approaches. As a result of this increased scrutiny by the FCA, we are seeing more liquidity breaches being reported to the regulator.

Secondly, there is a lack of clarity over how the rules should be applied. The MIFIDPRU liquidity rules are somewhat theoretical as opposed to practical, so often firms are unclear as to how to effectively model their ongoing liquidity requirements.

Finally, the current economic climate means that firms’ liquidity arrangements have a heightened importance. Firms are increasingly being asked to ringfence liquidity in the case of a wind-down and consequently are not able to fully optimise the use of capital invested in their businesses.